Market Report – 30th April 2021

Market Commentary:

• The All Share Index (NASI) rose by 2.1% w/w while the NSE 20 Share Index eased by 1.1% w/w to close the week at 169.15 and 1,866.58 respectively, characterized by an increase in market turnover (1.5% to KES 2.4 billion) and a decrease in volume of shares traded (-0.4% to 74.6 million shares). Notable gains on medium and large cap counters included; Safaricom (4.0% to KES 40.35 – an all-time high), BAT (4.6% to KES 453.75), Co-op (2.5% to KES 12.20) and HF (2.3% to KES 3.97). Safaricom’s gains were underpinned by reports that the company is one of only two bidders (along with MTN) that will participate in an auction for a mobile telecommunication license in Ethiopia. Britam eased by 3.7% w/w to close at KES 6.74 following the announcement of a KES 9.1 billion loss for FY2020. In the coming week, we expect price stability.

News Highlights:

Britam Posts an After Tax Loss of KES 9.1 bn for FY2020

• Against a backdrop of a challenging operating environment, Britam realized an after tax loss of KES 9.1 bn for FY2020, reflecting a considerable decline from an after tax profit of KES 3.5 bn reported in FY2019.
• The group’s bottom-line was principally weighed down by:
  2. net unrealised fair value losses on financial assets of KES 2.4 bn (FY2019: gain of KES 4.3 bn) which the group attributed to poor equities performance,
  3. higher operating & other expenses, which edged up by 53.0% y/y to KES 13.5 bn (which included a one-off KES 5.2 bn provision to support its Wealth Management Fund against the poor performance of the underlying assets),

• a 20.8% y/y rise in net insurance benefits and claims to KES 18.6 bn

823. a larger share of loss related to its associate (HF Group) amounting to KES 823.0 million (FY2019: a loss of KES 53.1 million) – which was adversely affected by the unfavorable operating environment and
824. KES 1.5 bn net loss from investment property and this was 96.8% y/y higher from a loss of KES 747.0 million posted in FY2019; this was on the back of a depressed property market in 2020.

• Britam reported a 3.9% y/y rise in gross earned premiums to KES 28.2 bn mainly supported by 50.0% y/y rise in gross earned premiums from regional general insurance to KES 7.9 bn (which benefitted from higher retention & new business), as gross earned premiums from the life business and Kenyan general insurance fell by 10.6% y/y and 1.0% y/y to KES 12.4 bn and KES 8.0 bn respectively.
• Net earned premiums, however, recorded marginal growth of 0.2% y/y to KES 23.1 bn as the growth recorded in gross earned premiums was offset by a 25.7% y/y increase in reinsurance premium ceded to KES 5.1 bn.
• On a positive note, interest & dividend income climbed by 21.8% y/y to KES 9.4 bn while fund management fees rose by 16.1% y/y to KES 621.5 million.
• Operating expenses (excluding the one-off provision) improved, easing by 6.1% y/y to KES 8.3 billion. Consequently, the group recorded a lower opex ratio (excluding the one-off expense) of 37.0% lower than the 39.0% reported in FY2019.
• Despite a 14.6% y/y dip in net cash generated from operations to KES 7.7 bn, the company pointed out that this cash level is higher than that generated by Britam’s listed peers.
• The Group did not recommend the payment of a dividend (FY2019: KES 0.25)

Commentary

• We note that the biggest impact on Britam’s financial performance was mostly from non-cash items and one-off expenses (mostly influenced by the adverse pandemic led economic conditions) as cash generation levels remain adequate.
• We, however, have some concerns about the performance of the life business which was the only unit to report a loss before tax of KES 2.9 bn (FY2019: profit of KES 3.7bn) compared to the regional general insurance unit (profit before tax of KES 0.8 bn, up from KES 0.04 bn in FY2019) and the Kenyan general insurance unit (profit before tax of KES 0.4 bn up from a loss of KES 0.3 bn in FY2019).
• On the flipside, we are optimistic about the growth witnessed in the regional general insurance business as this has the potential to drive growth for Britam going forward. According to company management, this growth has been underpinned by excellent customer service, claims settlement, intermediary support, strong staff capabilities, strategic partnerships and the selection of customers strongly aligned with their underwriting philosophy.
• Going forward, we expect to see Britam adopt a more data driven technological approach in managing its general business especially in pricing risks and managing claims.
• We note that the Group is working on finalizing the 2021 – 2025 strategy. Key areas of focus are expected to include investment strategy, regional expansion and the cost structure.
• The recommendation is under review.

CBK Invites Bids for FXD2/2019/15 (Re-open) and FXD1/2021/25 Treasury Bonds

• The Central Bank of Kenya (CBK), acting in its capacity as fiscal agent for the Republic of Kenya, has invited bids for the FXD2/2019/15 (re-open) and the FXD1/2012/25 with the intention of raising KES 30.0 billion for budgetary support.
• The features of the bonds are shown in the table below:

Source: CBK

• We recommend bidding as follows:
  1. FXD2/2019/15
     • Non-aggressive bids – 12.40% to12.70%
     • Aggressive bids – 12.80% to 13.00%

1. FXD1/2021/25
   • Non-aggressive – 13.30% to 13.60%
   • Aggressive bids – 13.70% to 14.00%

Recommendations:

EABL – Long-term Buy

KCB – Neutral

Equity – Hold